Housing market predictions for 2023: Will mortgage rates fall?

Mortgage rate predictions for 2023

Mortgage rates affect your monthly payment, the overall cost of the loan, and how much house you can afford. Two years ago, mortgage rates were at historic lows; two months ago, rates hit a 20-year high. While mortgage rates have gone down slightly since then, it's uncertain if they'll continue to drop in 2023. 

Some experts expect rates will stay below their 2022 highs. "There are nascent signs of inflation coming under control, and the Fed is signaling that it may slow down its rate increases going forward," says Sean Roberts, CFO of Orchard, a real estate tech company. "This shift is creating some optimism that mortgage rates may continue going down throughout 2023 and beyond."

David Meyer, BiggerPockets "On the Market" podcast host and VP of data and analytics, agrees. He says that while mortgage rates will likely remain volatile for the next several months, they should average below their recent peak of 7% for 2023. 

Shri Ganeshram, CEO and founder of real estate brokerage awning.com, is less optimistic. "Mortgage rates will decline slightly but end up higher overall across 2023. Expect interest rates to continue to rise and mortgage rates to reach their peak over the summer above 10%." 

Real estate housing market 2023: What will happen to home sales?

Mortgage rates have a major impact on home sales because they impact affordability. After the real estate buying frenzy of the past two years, home sales have cooled significantly — a trend that could continue into 2023. 

"Home sales volume should continue to show year-over-year declines for at least the first half of 2023," says Meyer. "If mortgage rates stabilize in the high 5s or low 6s, it's possible to see year over year increases in home sales in the second half of 2023." 

Roberts points out that no matter how difficult the housing market gets, millions of individuals and families still have to move for lifestyle and other structural reasons. "Housing is a basic need — not a luxury. The market will definitely slow down from the unsustainable highs of 2021 and 2022, but millions of existing homes will transact in 2023."

Ganeshram expects home sales will remain steady in 2023 — but below 2022 levels. "The key factors slowing down home sales will be interest rates. However, there is still so much demand from individuals, investors, and institutions that the market will continue to remain liquid."

Will home prices drop in 2023?

Home prices have soared since the early days of the pandemic. But high interest rates are pricing many would-be buyers out of the market, forcing some sellers to accept lower prices.  

"One positive of rising mortgage rates is that fewer buyers will be competing for the same homes," says Roberts. "With some either priced out of the higher range of their search or choosing to stay longer in their current homes, we're already seeing home prices start to decline, and we expect that price decline to continue through 2023."

Ganeshram also expects to see a dip next year. "Home prices will fall slightly, between 5% and 10% in 2023. This will be closely connected with the slow season in the winter and early spring and rising interest rates."

While the consensus is that home prices will cool over the next few months, there's less certainty looking further out. Meyers expects prices to start registering year-over-year within the first few months of 2023. But he adds, "What happens in the second half of 2023 is very unclear and will depend largely on mortgage rates and inflation." 

Of course, every market is different and has unique supply/demand characteristics, says Roberts.

"Markets like Phoenix, Las Vegas, Boise, Dallas, etc., that saw a 30-40% home price appreciation post-COVID and have a large upcoming supply of new homes are more likely to see declines of 20% or so," says Tejas Joshi, Director of Single Family Rental (SFR) at Yieldstreet, an alternative asset investment platform for retail investors. "For others, it will be more tempered."

For example, Florida, North Carolina, and Georgia markets, Joshi says, have been quite strong with a lot of single-family residence investors involved. He'll be keeping an eye on those markets because investment activity will set a floor on how much prices drop.

Will housing inventory improve in 2023?

A continually increasing population, the prevalence of institutional investors, and the pandemic (with its sky-high materials costs, labor shortages, and supply chain issues) have contributed to the current housing shortage. While inventory has increased since earlier this year, there still aren't enough homes to meet demand.

"After a rebound from pandemic lows over the second half of 2022, inventory has remained relatively stable for the last several months," says Meyers. He doesn't expect a massive increase in inventory for existing homes because many would-be sellers are opting out of this housing market. 

Roberts explains one reason sellers are sitting out. "Given higher interest rates today, more than 85% of homeowners with a mortgage are 'locked in' at sub-5% rates, so many people may choose to stay in their current homes for longer rather than rushing to sell." 

Like Meyers, Roberts expects the inventory situation to improve little in 2023. "Covid-related materials and labor delays have also stalled several construction projects, and we're seeing home builders start to pull back sharply on new construction pipelines now. While there may be less competition in 2023 for the houses on the market, inventory will likely continue to be tight."

Rising interest rates could bring more foreclosures in 2023 (there's already been an uptick this year as foreclosure moratoriums and other Covid-related foreclosure protections expired at the end of 2021). And Ganeshram says that could impact inventory. "Housing inventory will increase in 2023 as some homeowners default on their mortgages. Homes will also sit on the market for longer on average, resulting in an increase in overall housing inventory."

Will it be a buyer's or seller's market in 2023?

Certain regional housing markets could remain in a seller's market in 2023. However, Meyers expects that on a national level, the housing market will look like a buyer's market in 2023. That would be welcome news to buyers after years of intense bidding wars, few (if any) concessions, and sight-unseen offers in fast-moving markets.

Roberts has a similar outlook and expects buyers to have more leverage in 2023. "For the past two years, buyers have been able to ask for zero concessions from sellers. It may not become a buyer's market in every area, especially popular cities where competition is still fierce for homes, but 2023 will allow buyers to have more negotiating power and be able to make requests such as repairs or reduced closing costs."

Still, tight inventory could temper the buyer's market. "2023 will be a buyer's market — but not by much," says Ganeshram. "Sellers still exert a large amount of leverage in negotiations."